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China: full of opportunities, but investors beware

By Simon Pitman , 26-Mar-2007

With China consumers buying up personal care and cosmetic products at unprecedented rates opportunities for abound for investors, but a new financial report advises caution.

Backed by incredible economic growth, China is set to become the world's second largest consumer market, behind the US, with financial analysts Credit Suisse estimating that consumption will reach $8.8 trillion by 2020, putting it only behind the massive US market. But despite the huge potential, the report's author, Vincent Chan, suggests that pinning down winning strategies could prove 'tricky', having to deal with problems such as bureaucracy, price structuring and adapting to the culture of the local market. Speaking at a conference, Chan explained that foreign company's are often finding it hard to penetrate the local market because domestic players are longer established and are more knowledgeable about the characteristics of the local, giving them the advantage. The findings of the report are based on its China Consumer Survey which relied on 2,700 respondents from the country's major cities responding to questions that give an insight into their spending patterns during 2006. In particular the report showed that whereas the demand for electronic goods is starting to slip, consumers are plumping more and more for local cosmetic and personal care brands, reflecting increased consumer confidence in the category. The survey showed that the reason for this boiled down to price, with 75 per cent of respondents saying they were unwilling to pay more for foreign cosmetics brands, a figure that has risen significantly compared to the same survey results in 2004 and 2005. The findings suggest that China consumers are maturing and becoming more discerning, no longer prepared to pay a premium price for a product just because of its name. The confidence of China consumers was shaken in 2006 after tests carried out by a China watchdog found that the Procter & Gamble's SKII premium skin care range contained potentially dangerous heavy metals. Although the claims proved to be unsubstantiated, industry experts believe that P&G's handling of the situation proved to be a public relations disaster, leaving behind many angry and dissatisfied consumers. Undoubtedly the scare has had a bearing on the perception of premium positioned cosmetic brands, leaving many consumers in China questioning why they should pay the extra price for this kind of product. To address this problem foreign cosmetic players will have to re-evaluate their positioning on the market as well as their price structuring if they are going to maintain their position in the market.

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